Tesla CEO Musk, Oklahoma teachers, lost out on bonuses
Today’s column presents two sides of the same coin. Two parties — one an individual, the other a group — who lost a bonus.
Like Goldilocks, tax law often entertains thoughts of too much, just right and too little. Deductions for compensation paid, for example, must be reasonable in amount.
Elon Musk’s Tesla is incorporated in Delaware. I received an undergraduate degree in accounting from the University of Delaware.
My studies included a business law class. We were told that Delaware was the preferred state for large corporations to incorporate.
Delaware’s status, we were advised by our Delaware faculty, was the fruit of a series of longstanding judicial precedents, unmatched by any other state, of favoring management over shareholders.
In 2018, Elon Musk and the Tesla board came to an agreement for a bonus arrangement for Mr. Musk. The bonus tied 12 option tranches to Tesla market capitalization, earnings and revenues.
At grant date, the bonus was valued at $2.6 billion. If all performance measures were realized, the bonus value would be $55.8 billion.
All measures were realized. But Tesla shareholders filed a derivative suit in Delaware Chancery Court contending that the bonus breached the board’s fiduciary duty to the shareholders.
It turns out that the management-leaning Delaware law has an “entire fairness standard” when evaluating board actions made with a “conflicted-controller” manager.
Judge Kathaleen McCormick had to determine if Musk “controlled” Tesla. There was no precedent to follow.
McCormick held that Musk did control. He owned 21.9% of the equity, was revered as a “Superstar CEO” and had close ties with board members.
Board members testified. One said the bonus process was “cooperative.” Another said there was no “positional negotiation.”
Another said, “We were not on different sides of things.” That is, there were no adverse-interest negotiations to set the bonus.
Musk’s attorneys made several arguments. One was that much time was spent negotiating the details of the bonus.
Judge McCormick had a doozy of a quote in reply. She said, “Time spent only matters when well spent.” Sounds like Will Rogers, or even Ben Franklin, could have said that.
It turns out that the Delaware Chancery Court held that a $55.8 billion CEO bonus was not reasonable. Musk now says that no corporation should incorporate in Delaware.
Poor Elon. I hope that he is financially able to push forward without this $55.8 billion bonus. If you are curious, yes, I got it right. It is billions, not millions.
The other side of the coin is a group of teachers in Oklahoma. Teacher pay in Oklahoma ranks 38th nationally. There is a shortage of teachers.
To recruit more teachers, Oklahoma instituted a bonus plan. Teachers in high-demand areas, such as special education, could get as much as a $50,000 one-time bonus.
The peak bonus was almost — not quite but almost — the Musk bonus divided by 1 million. The state is now seeking to recover some of the bonuses paid.
One teacher is being asked to repay $50,000. She spent the bonus on home improvements and a functioning car.
She does not agree that she did not meet the bonus requirements. She does not have the money. She said she “cried for two days straight” after getting the repayment request.
Perhaps Elon Musk cried for two days straight after losing his bonus. The story I read did not mention that. It only said he threatened Delaware with loss of incorporations.
A group of Oklahoma teachers marched from Tulsa to the Capitol in Oklahoma City to protest teacher pay. That’s 110 miles. Of walking.
My story also did not mention if Mr. Musk walked from Wilmington to the Capitol in Dover to protest the loss of his bonus.
Wilmington to Dover is only 50 miles. I suppose he could have turned around and walked back to Wilmington to (almost) match the Oklahoma teachers.
I just re-read this story and realized that some of you might not understand how these two stories are just two sides of the same coin. Let me elaborate.
See, they both thought they would get a bonus, and both lost out on at least some of the bonus. That means it’s exactly, umm, well almost, ahh. I’ll get back to you.